Financial situations tend to fluctuate along with circumstances. Every individual has, at least once in their life, struggled with a situation wherein they have struggled with financial independence.
Whenever one needs money, they can depend upon a credit card or a short term personal loan. While both options are viable, it is often difficult to decide which option would work better for you. As it is pretty confusing to choose between these two, we will be analyzing the pros and cons of each alternative and you can decide for yourself which one is relatively better.
Broadly speaking, credit cards are more suitable for short-term debts and personal loans are ideal for individuals who require a greater amount of time for loan repayment. While these demarcations are pretty clear, the better option for you might just hinge on the factor of interest rate.
Credit Cards vs Personal Loans
As per definition, a personal loan is a fixed loan with equal monthly payments over the length of the loan repayment. It is essentially an unsecured loan availed by individuals from a bank or NBFC in order to meet their financial needs. On the other hand, a credit card is considered as revolving debt, as the amount of money one borrows differs as per their spending and how much they pay off each month.
How Do Credit Cards Work?
Credit cards are a more widely-accepted form of credit, as they provide individuals with a convenient payment module for whatever items they wish to buy, at a store or online. Well, that sounds pretty convenient – what’s the downside? Unfortunately, using a credit card for regular purchases and neglecting balance payments can result in massive interest charges that tend to accumulate over time.
Credit cards do not require an individual to pay their balance amount in one go. That’s a part of its charm (and ensnarement): providing an enticing option of minimum monthly payments while allowing credit interest to stack up against the remaining balance. The interest levied is dependent upon the card’s APR (Annual Percentage Rate). If an individual’s APR is high, their interest charges will stack up at a rapid rate. Hence, the term “revolving debt”.
Every individual starts off with a standard credit limit. However, the amount one can borrow depends upon how much they choose to splurge and how much they pay off on a monthly basis. Most credit cards are unsecured, hence, they offer a line of credit that doesn’t warrant collateral. On the flip side, secured credit cards require a cash deposit as collateral for the purposing of securing the line of credit.
Pros | Credit Cards
- Application for a credit card is swift and easy. Usage can vary as per need.
- Qualification for a credit card is fairly easy too, provided that you have an average credit score.
- Application can be carried out online, one does not have to physically visit a bank anymore.
- Certain balance transfer credit cards offer 0% interest from around 12 to 21 months.
Cons | Credit Cards
- If your card’s APR is high, interest charges can accumulate and pull you into a debt trap.
- Certain credit cards charge annual fees, over-the-limit fees, and late fees, which can add to your expenses.
- One requires exceptional credit in order to qualify for credit cards with the lowest interest charges or the most lucrative reward programs.
- While all kinds of items can be purchased via a credit card, one may have to give a cash advance fee in case you require cash.
Hence, avail a credit card only when you are confident that you will be able to pay off your balance quickly and minimize interest payments.
How Do Personal Loans Work?
In certain scenarios, a personal loan might fare better than a credit card. Personal loans tend to offer lower interest rates in comparison to standard credit cards, especially so if an individual possesses a good credit score. Personal Loans grant you with a lump-sum amount, which warrants regular monthly repayments over the duration of your loan, which is generally between 2 to 10 years,
Personal loans can either be secured and unsecured – if unsecured, one is not required to put down collateral. If secured, you require collateral of some type. A certain type of secured personal loan, namely Home Equity Line Of Credit, allows you to borrow a certain amount against the equity in your home, utilizing the same as collateral. Also, the interest paid is most likely tax-deductible.
Pros | Personal Loans
- Personal loans usually come with lower interest rates.
- They are generally great for consolidating debt, provided you can avail a lower interest rate.
- Personal loans can be applied for online or at traditional banks.
- They come in both secured and unsecured forms.
Cons | Personal Loans
- One needs to adhere to a strict payment schedule, which is recurring on a monthly basis.
- For qualification, one generally needs to have a good or exceptional credit score.
- There might be trouble during loan application if you’re not able to procure a lengthy credit history.
Hence, avail a personal loan when you require a greater length of time in order to repay the loan. Also, make sure that your credit score is good enough to avail a lower interest rate.
In order to resolve the dilemma of credits cards vs personal loans, you need to take a call as per your credit history, spending habits, and personal preferences. Only you know what suits you best – in case you are still confused as to what to choose, it is best to consult a financial advisor for making an informed decision.